Both an MBO and an MBI involve the purchase of a business – but by different means. MBOs and MBIs provide a useful indication that a company is likely to grow: new owners and more incentivised managers are often able to fast-track a company’s growth. Below, we explore the differences between the two events.
An MBO refers to a management buyout. Put simply, this refers to a management team from inside a company pooling their resources, or attracting investment, to take control of the company. Usually, with the management group’s expertise and familiarity with the company, this can result in a period of growth.
It can be a promising situation for the seller for a start. When a management team from the inside is looking purchase the company, you don’t have to worry about divulging sensitive information about the business to outside parties. Plus, the seller should be more familiar with the buyers and might have greater piece of mind that their company will be left in good hands after the purchase.
The management team will often need to secure external funding to purchase the company. This investment could come from parties with different priorities which can make it a difficult process. Alternatively, funding might have to come from bank loans which could limit the growth of the company in the future. Often the management group will need to get advice on the tax consequences of a buy out too.
An MBI refers to a management buy-in. This is the purchase of a company from an outside management group.
New management can completely refresh a company. The new owners could come with greater expertise, or useful contacts that can revitalise the business. Employees often take notice of new management and a fresh start too, leading to a production boost.
External management won’t be as familiar with the company, so they’ll need to carry out more research. This can involve costly market analysis and research into competing bids from third parties. The legal structure of the deal will usually be the same though: a new corporate group will be formed as part of the process to take control.
Ultimately, both MBOs and MBIs will see a management group take ownership of the company. Both have advantages and disadvantages, but both can suddenly help a business achieve growth.